Revitalizing Housing

In the past six weeks, the yield on the 10-year Treasury note has declined from a near-term peak of 3% to today's current level of just below 2.5%. This has allowed 30-year fixed mortgage rates to decline as well, and by an even larger margin as the spreads for Agency debt over Treasuries have declined by an even larger percentage.

Six weeks ago, the par rate for a 30-year fixed rate purchase money mortgage was about 5% on average across the spectrum of government guaranteed (FHA/VA) and government sponsored (Fannie Mae/Freddie Mac) mortgages. Loans for amounts above the limits specified for each of these categories were about 50 basis points higher.

This was a jump from the 3%-3.5% level that prevailed at the beginning of the summer and was the result of the rapid increase in long-end Treasury yields caused by bond traders anticipating the Federal Reserve beginning to purchase fewer mortgages and Treasury debt.

That increase was the fastest rate of increase in Treasury yields and mortgage rates in U.S. history and caused both refinance and purchase activity in the housing sector to essentially seize. Ironically, that provided the Fed with the opportunity, and perhaps necessity, to not begin to reduce their purchases of mortgages and long-end Treasuries. And that has helped to bring yields on both back down.

Although the 10-year Treasury yield has only retraced about a third of its increase since May, the 30-year fixed mortgage rates have recovered about half of the spike that occurred this past summer and it is beginning to revitalize the refinance business again. It is also attracting buyers back into the market that had retreated from the summer spike in mortgage rates.

Both of these, if the trend continues, will set the housing market up for a very strong Spring / Summer 2014 market. Although that may seem like a long way out, most home buyers begin to seriously prepare for a spring/summer sale / purchase during the holiday season of the previous year; typically between Thanksgiving and year-end.

However, there are some headwinds coming, too. Following the 2008-09 financial crisis, the mortgage loan limits for agency (Fannie Mae and Freddie Mac) mortgages were increased substantially because the non-agency mortgage market and MBS market had ceased functioning. The original expanded loan limit was $729,000. It has since been reduced to $625,500 and will be reduced again starting January 1, 2014 to $417,000. This was the limit that prevailed prior to the crisis.

For loans above the $417,000, agency limit liquid reserve requirements will be increased to those set by the mortgage lenders and are substantially higher than those required by Fannie Mae or Freddie Mac. Liquid reserves, after loan closing, normally have nine months' worth of mortgage payments (Principal Interest Taxes and Insurance).

For a loan of $418,000 with a mortgage rate of 4%, the principal and interest payment is $1,995 monthly. Average real estate taxes of $625 monthly and home owners insurance of $75 brings PITI to $2,695. Nine months of liquid reserves, after closing, will require mortgagors to have $24,250 set aside as a buffer.

There are no liquid reserves currently mandated for that same loan if originated today and through year end. That will cause a drag on move up home sales. If you are considering such a purchase next year ,it may be prudent to do so before the end of this year instead

Another issue that is going to be having an increasing impact on the ability of borrowers to access mortgage capital is the expansion of the CFPB oversight of the mortgage industry. The portion of the mortgage lending market most prepared for the new and expanding oversight of the industry by the CFPB are the money centers: JPMorgan (JPM), Bank of America (BAC), CitiGroup (C) and Wells Fargo (WFC). Of these the most active lender in the sector is Wells Fargo, by far.

All of these issues combined should have a very favorable impact on Wells Fargo's business. The stock price for WFC has been trending sideways since the yields and rates jumped this summer. I expect that to change shortly and for the stock price to increase over the next 12 months by at least 10% -- perhaps more.